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© 2012 Thomson Reuters
Intersections of Bankruptcy
Law and Insurance Coverage
Litigation
richarD l. ePlinG, kerry a. Brennan
& BranDon JohnSon
© 2012 Pillsbury Winthrop Shaw Pittman LLP
Bankruptcy and insurance law frequently intersect and sometimes
conflict. This article addresses the most important of these intersec-
tions, including the ability of a debtor to satisfy insured claims by the
assignment of coverage proceeds in bankruptcy, the treatment of D&O
insurance in bankruptcy, a debtor’s non-payment of a deductible or self-
insured retention (“SIR”) as a defense to coverage, “buy back” agree-
ments and coverage-in-place settlements in bankruptcy, the ability of
insurers and/or debtor-affiliates to obtain third-party releases, insurer
insolvency and potential gaps in coverage, and paid-loss retrospec-
tive policies and a bankruptcy estate’s bad faith claims. As discussed
throughout, this is an area of law that is quickly developing and where
several issues remain unsettled.
I. Bankruptcy Claims snd the Assignment of Coverage
A. Property of the Bankruptcy Estate
The bankruptcy estate is broadly defined as including “all legal or
equitable interests of the debtor in property as of the commencement
of the case.”1 Accordingly, upon the filing of a petition, the debtor’s
insurance policies automatically become property of the estate.2 An in-
surance contract may contain a provision that purports to terminate the
policy if the insured becomes subject to a reorganization proceeding.
These provisions are void under the Bankruptcy Code.3
While the Bankruptcy Code defines the scope of the bankruptcy es-
tate, property entering the estate remains subject to the limitations im-
posed by applicable state and non-bankruptcy federal law, unless the
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© 2012 Thomson Reuters
Bankruptcy Code preempts or overrides such law.4 As such, the right of
the debtor to assign its insurance coverage proceeds in satisfaction of
a claim will generally be determined by applicable state insurance law,
unless there has been federal preemption.5
An insured’s right to ongoing coverage is generally not assignable.6
On the other hand, state law generally does permit the insured to assign
its right to insurance proceeds after a “loss” has occurred.7 Bankruptcy
courts have recognized that a policyholder may assign its rights to in-
surance proceeds either pursuant to the policy itself, or in a settlement
with an insurer resolving a coverage dispute. Accordingly, the prevail-
ing trend in the case law is that:
The overriding question when determining whether insurance pro-
ceeds are property of the estate is whether the debtor would have a
right to receive and keep those proceeds when the insurer paid on a
claim. When a payment by the insurer cannot inure to the debtor’s
pecuniary benefit, then that payment should neither enhance nor
decrease the bankruptcy estate. In other words, when the debtor
has no legally cognizable claim to the insurance proceeds, those
proceeds are not property of the estate.8
Stated another way, “[w]hether the proceeds of an insurance policy
are property of a debtor’s estate depends upon the nature of the
policy and the specific provisions governing the parties’ interests
in the payment of policy proceeds.”9
The determination of estate property “must be analyzed in light of
the facts of each case.”10 However, as a general rule:
Examples of insurance policies whose proceeds are property of the
estate include casualty, collision, life, and fire insurance policies in
which the debtor is a beneficiary. Proceeds of such insurance poli-
cies, if made payable to the debtor rather than a third party such as
a creditor, are property of the estate and may inure to all bankruptcy
creditors. But under the typical liability policy, the debtor will not
have a cognizable interest in the proceeds of the policy. Those pro-
ceeds will normally be payable only for the benefit of those harmed
by the debtor under the terms of the insurance contract.11
In the liability insurance context, courts have recognized that the debtor
may have “no cognizable claim to the proceeds paid by an insurer on
account of a covered claim” due to the fact that the proceeds are paid
directly “to the victim of the insured’s wrongful act.”12 Other decisions
have held that liability policies that are payable to the debtor are prop-
